Profit & Loss Calculation and Leverage & Margin

Profit And Loss Calculation
One does not need to worry about calculating his or her profit and loss manually everyday as all the online trading platforms do this automatically. However, here is a simple demonstration.

Assume that you buy a lot (long position) of Euro/USD at the rate of 1.2350/1.2359 as you think that Euro is going to appreciate. The first value stands for bid price and the next one for ask. This means you are ready to pay 1.2350 USD to buy one Euro and the selling price of Euro at the instant is 1.2359.

If your speculation is right and the price hits the level of 1.2369/1.2372 and you exit the position.

Now you had paid US$ 123,500 to buy 100,000 Euros which you sold at US$123,690 notionally. So at even 1% margin premium, your initial deposit would be $1,235. Your profit is a cool 1.2369 - 1.2350 =19 pips which equals $190; (US$123,690 - US$ 123,500 = $190.)

The above approach is clearly simplistic and so does not take into consideration the overnight differential interest in case of rollovers to the next trading day (tom next.) Also you need to factor in the premium amount in case of options trading which differs from traditional style to SPOT. Be careful to confirm with the broking house about the premiums for both American style and British style trading options.

Leverage & Margin Trading
If you did not know already, some brokers allow leverages of upto 200 times of your account deposit. This is the biggest advantage or rather attraction to trade forex than stock or futures market. But why is this so high only on forex market?

The higher leverage is not without a valid reason. The low volatility of forex market - ordinarily around 1%- is pretty much less than stock markets which give a room of 5-10%. So for traders to realize reasonable profits with least account capitals even in range bound market movements, leverages are essential. Traders confidently enter positions with their higher buying powers.

Margin trading in forex parlance differs in meaning and practice from stock trading. Here it is the amount you need to buy a currency minus the leverage the broker permits you. Suppose you buy USD/JPY worth of $150,000 with a permitted leverage of 200:1, the money you would pay equals $3,000 only and the balance amount is collateralized from your open position. The $147,000 advanced for the trade is not interest payable unlike in the case of stock market scenario.

Margins and leverages attract traders like lamps, flys. They magnify both profits and losses.

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Jason Uvios writes about "Profit & Loss Calculation and Leverage & Margin" to visit: foreign movie, foreign exchange trading and foreign films.

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